RBC, Espresso Capital deal provides jolt for tech lending

In what is understood to be the first of its kind for both parties, two providers — one the country’s largest bank and the other a privately held fintech company that provides venture debt to technology companies — have teamed up to create a national “strategic partnership.”

Royal Bank of Canada, believed to be the country’s largest technology banker and which typically provides first-lien secured debt, and Espresso Capital, which typically furnishes second-lien secured debt, are the two parties behind the partnership.

That partnership, RBC said, “represents another way” for it to deliver “differentiated solutions that meet the needs of the Canadian technology sector.”

RBC noted that technology companies “have a unique set of needs and we are continually looking to evolve our offerings for businesses in all stages of their growth journey.” In short, by combining capital and banking solutions with industry expertise, the hope is “to support even more Canadian technology entrepreneurs to scale and accelerate their growth.”

Espresso, which has three Canadian offices, was not a random choice for RBC, which has had “a positive, long-standing working relationship” of many years with Espresso. “Our complementary strengths provide a strong value proposition for technology clients,” the bank said.

Alkarim Jivraj, chief executive of Espresso Capital, which has financed about 230 technology companies since being formed in 2009, said the partnership will offer ”a truly differentiated lending solution for fast-growing companies.”

The partnership, he added, will combine RBC’s “best-in-class lending and banking capability and global networks with Espresso’s true venture-debt capability.” The “integration” will “be super efficient” for companies seeking to match their debt needs with the stages of their development.

“We benefit from the breadth and reach of their system and relationships, (which will) help broaden awareness of the value proposition that is venture debt,” noted Jivraj, adding that both parties will bring customers and lending capability. “The idea is that our teams will work together in a market-facing partnership,” even though there is no revenue sharing.

Recently, Espresso broadened its lending to provide clients with loans equal to up to 24 months of recurring revenue. Previously, Espresso, which raises capital from high-net-worth individuals and lends it on, would lend up to 12 months of recurring revenue.

Jivraj said the increase in the amounts being loaned was made “to better match the lending program with the value creation trajectory of some of our investee companies,” which are now “earning a better leverage because they are performing so well.”

Jivraj termed the new expanded lending development “smarter lending,” rather than taking on more risk. “In our lending decisions, we always balance two things: How do we get the best lending solutions into the hands of our borrowers while not exposing our investors to undue risk,” a balance he says is helped by Espresso’s “data-driven approach.”

“We are small and nimble” and not in the business of lending to own, he added.

Accordingly, Espresso is selective as to which companies it provides venture debt, a category of capital that allows the founders to retain economic and strategic control over their company longer than if they were to fund with equity alone.

Espresso has about $100 million in loans outstanding. On average, each loan, which is revolving and comes with a three-year term and an interest rate in the low to mid-teens, is about $2 million.

RBC has some other irons in the fire. For instance, it has committed $100 million to fintech-focused venture funds and startups to further new technologies and pursue emerging trends. It has also been a founding partner for many incubator and accelerator programs and is a strong supporter of events that bring together ecosystem participants.

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